The International Monetary Fund isn’t known for its forecasting prowess in Asia. Even by those standards, its latest guesstimate for Japan is a standout.
By the IMF’s math, a magnitude 9.0 earthquake, a 23-meter tsunami and nuclear reactors leaking radiation will barely nick growth. It now sees Japan advancing 1.4 percent this year, down from its earlier 1.6 percent prediction. That raises a very technical econometric question: Huh?
In the days after the March 11 quake, it was plausible to argue that rebuilding efforts would support growth. That was before blackouts shuttered Sony Corp. and Toyota Motor Corp. plants, foreign executives rushed to the airports and tourism dried up.
It was before we knew radiation might spew out of Fukushima for years to come. News that the severity rating of the accident was raised to 7, the highest level on the International Nuclear and Radiological Event Scale and matching the 1986 Chernobyl disaster, will damp already weak consumer and business spending.
Welcome to Japan’s New Normal, and it all but ensures that the IMF is way too optimistic. Here are three reasons:
No. 1. The doubt factor. Keynesian economics and Japanese history leads forecasters to expect a growth jolt. Lots of roads, bridges, ports, rail lines and buildings must be rebuilt in the northeastern Tohoku region, which accounts for roughly 8 percent of gross domestic product. What this overlooks is the traumatic nature of Japan’s latest experience.
The economy is largely about Tokyo, and that’s just 220 kilometers from the crippled Fukushima Dai-Ichi nuclear plant. Doubt is already aborting recoveries in industries that have been struggling for years. Real estate trusts, for example, are shelving property sales and suspending fundraising plans as the crisis saps investor appetite for assets. Cargo ships and airplanes are being turned away for the faintest traces of radiation.
Manufacturers stung by supply shortages over the last month won’t soon forget it. This may drive executives ― including Japanese ones ― to diversify operations away from Japan. That means any business investment over the next couple of years may benefit growth abroad at Japan’s expense.
Finally, the inclination of Japanese households to oversave may soar amid worries about another temblor, tsunami and the steady drip, drip, drip of bad news on radiation levels. Fear of what’s to come is fostering a spirit of thrift and self-restraint. When luxury shops and posh eateries aren’t closed to save energy, they’re empty. Shopping, a favorite Japanese pastime, is now seen by many as gauche.
No. 2. Tepid world growth. Japan’s recent success in weakening the yen won’t be the boon to exports many believe. U.S. growth is limping along, Europe’s debt crisis is closing in on Spain and key emerging-market economies are beginning to slow. That includes China, Japan’s biggest export market.
One reason Japan recovered so quickly from the Kobe earthquake in 1995 was booming global demand. It occurred as the advent of the Internet sparked a communications and information revolution, while the American consumer helped Japan avoid the worst of the 1997-1998 Asian crisis that the IMF handled so poorly. Today, the tech bubble is long past and U.S. shoppers are trying to pay down post housing-bust debt.
It doesn’t help that Japan’s policy toolbox is empty. Short-term interest rates are already at zero and public debt is double the size of the $5 trillion economy. Worries that credit rating companies will downgrade Japan have lawmakers leaning on the central bank to make 1930s-style purchases of government bonds to fund quake-rebuilding efforts.
Fiscal and monetary pump priming will be of limited utility without external growth engines. Even China will become a less reliable one now that policy makers in Beijing are stepping up their inflation fight. Slower Chinese growth will entail waning demand for Japanese goods.
No. 3. Uninspiring leadership. Before the ground shook on March 11, speculation was rife that Prime Minister Naoto Kan would step down amid fund-raising scandals and dwindling public support. After a promising start last June, Kan did little to end deflation, raise competitiveness, address surging debt or prepare for an aging population.
These challenges are now more complicated. The estimated $300 billion price tag for rebuilding Tohoku leaves less money to address structural impediments to long-term growth. Those estimates probably understate the cost because they don’t account for the disruptions to daily life and scuttled business ventures.
Since nuclear experts can’t agree on the worst-case scenario for Japan, predicting the economic impact is like anticipating just when the ground will shake again, as it does every five hours or so.
Fukushima is now in the history books next to Chernobyl. As Japan’s 127 million people and corporate executives hold their collective breaths, does anyone really expect a return to business as usual anytime soon?
Economic revival is largely a game of confidence. In Tokyo, there’s little faith in the leadership as the worst postwar crisis unfolds seemingly without end. This political paralysis is part of the mix as we begin to calculate the fallout from Japan’s New Normal.
Just something the IMF may want to consider the next time it decides Japan can avoid a recession.
By William Pesek
William Pesek is a Bloomberg News columnist. The opinions expressed are his own. ― Ed.
(Bloomberg)
